06/01/2018

Branch of the Future: Is Technology the Only Answer?

Brad Kvederis June 1st, 2018
Categories
Customer Engagement

When we talk about the Branch of the Future in banking, most of what we think about tends to be those new branch pilot concepts that are trotted out every year: Futuristic designs full of touchscreens, self-serve stations, open floor plans and lounges. In other words, we imagine branches that look like anything BUT a bank branch as we now know it.

It’s tempting to get caught up in all the (expensive) gadgets and technology – there’s no denying that a lot of it looks really cool. But we’re going to propose a radical new theory: The bank branch of tomorrow is actually going to look a lot like the branch of today, only smaller.

Before you accuse us of blasphemy, let’s think about the fundamental issue banks are trying to solve with these futuristic concepts. Declining foot traffic and customer migration to online channels have sapped the efficiency and profitability of brick-and-mortar branches, but the cost of operating those branches has remained the same.

Three possible solutions to this quandary exist: Increase the number of visitors; reduce your operating costs (averaging $530,000 per branch annually as of 2015); or change the behavior of your customers so they are more profitable.

The problem, at least among the most visible Branch of the Future pilots, is that banks cannot seem to make up their minds which one of these goals they want to accomplish. (Is it even possible to do all three at once? Perhaps – but then again, maybe not.)

What if we knew ahead of time which way did work, though, and focused our efforts on that? You might say that’s impossible to know, since this type of branch transformation has never happened before. It turns out, however, that banks all over the world have been dealing with the exact same problems for decades; it’s just the problems go by a different name.

To simulate a future with declining foot traffic, or of narrow brick-and-mortar profit margins, all we must do is visit any small town with a bank. The number of visitors and transactions in a small-town branch today is the future that larger banks are looking ahead to so nervously – it’s like stepping into a foot-traffic and transaction-volume time machine. So, how are some banks operating successfully in these places right now?

Learning to Share Pays Off

Unfortunately, in many areas of the U.S., the common answer is to close branches entirely, leaving residents with few (or no) local options for visiting a branch in person. Elsewhere around the world, though, banks have adapted to foot traffic and transaction volume far more extreme than anything found in the U.S.

The general store in Camooweal, Australia, offers a different take on the “Branch of the Future” – one that has not changed much from the branch of today, or from the branch of yesterday. (Photo: Tracey Peach / Creative Commons 2.0)

Camooweal, Australia (pop. 187) is one of the most remote communities in the Australian Outback, yet its residents can do business with more than 70 banks and credit unions. GBTI Bank in Guyana recently opened a branch in Port Kaituma – a rough-and-tumble mining town deep in the Amazon, with dirt roads and little access to the outside world. In Brazil, home to some of the most remote and inaccessible terrain on the planet, every one of the country’s more than 6,000 municipalities has access to in-person financial services.

These solutions to the dual problems of low foot traffic and slim branch margins all share one thing in common – and it isn’t touchscreens or lounges. In every case, the banks have “piggybacked” on existing infrastructure to open mini-branches or microbranches in others’ establishments at a tiny fraction of the cost of running a traditional branch.

The local post office tends to be a popular choice for this type of shared-space arrangement, since most countries’ post offices already have extensive brick-and-mortar networks with plenty of foot traffic. (In fact, more than three-quarters of the world’s countries offer some form of postal banking, making it the second-most common way for people to access financial services.) Some countries, such as Brazil, have chosen a single bank to operate banking counters in all postal locations within the country. Others offer basic services at the post office on behalf of several banks. Still, others have post offices that operate their own fully licensed banks.

There’s no reason why this piggybacking has to stop at the post office, though – or even involve the post office at all. Camooweal’s “bank branch” is actually a counter in the local general store, which has contracted to be a licensed operator for the post office, which has in turn contracted to accept transactions on behalf of several banks. GBTI’s branch in the Amazon shares a building with the local offices of several government agencies. And while Brazil may have 6,000 or so post office branches, the real heavy lifting is done by more than 100,000 “agency bankers” – ordinary shop owners authorized to carry out basic transactions for one or more banks. Any retail business – from a grocery store, to a gas station, to a bar – might also offer banking services, for which the owner is typically paid a per-transaction fee of a dollar or two.

Going with the Flow, Or Fighting High Tide?

These low-tech approaches get much less attention than the big banks’ flashy Branch of the Future pilots. For years, though, they’ve quietly been doing the same job that those built-to-be-buzzworthy projects are intended for – and with thousands of successful real-world examples to back them up. Why have those ideas flown under the radar in the U.S. so far?

Let’s go back to the fundamental problem of declining foot traffic in branches and the three possible solutions: Reducing costs; figuring out how to increase foot traffic again; or making the remaining customers more profitable. Out of those three options, the first accepts the fact that customer behavior has changed and attempts to adapt to that new reality. The second and third try to overpower customer behavior. Which method sounds more likely to succeed?

Don’t get us wrong – the fact that low-tech approaches have proven successful is not to say that new technology has no place in future branch designs. In fact, it will play a key role in the cost-reduction process. And the banks have already taken some tentative steps down the path of the right-sizing branches and leveraging infrastructure – witness the emergence of the grocery store branch, for example.

For whatever reason, though, right-sizing and microbranches are kept in a separate ideological “bucket” from Branch of the Future projects that focus on technology. Why aren’t they used together?

In-store branches have been around for many years now, and while they don’t carry the “Branch of the Future” label, they do show a willingness to leverage infrastructure. Kiosks and automated self-service stations might not bring foot traffic back to the branch, but they can help separate the profitable transactions from the routine ones.

With shared infrastructure and creative staffing arrangements, it’s entirely possible to cut the cost of operating a branch in half, if not even lower. Will making your branch look like a coffee shop draw in twice as many customers, or make their visits twice as profitable? We don’t know, but we kind of doubt it. Could a kiosk or a video teller divert some of the mundane transactions and let your smaller-sized branch get more done for less overhead? Now we’re talking.

The Branch of the Future isn’t going to be only about technology and touchscreens, or about converting routine transactions into lucrative loan and investment-product sales. The Branch of the Future is just as likely the grocery store branch, the coffee shop branch, or the agent taking your transaction at a motel or a laundromat. There’s no reason technology won’t be a part of that – but it’s only one half of the puzzle that is branch sustainability. For whichever banks figure out how both can be put together, the future of the brick-and-mortar branch isn’t bleak – just different.

This content is accurate at the time of publication and may not be updated.